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Chapter 20 ‒ Accounting and Finance in the International Business
20-8
and {https://www.bloomberg.com/news/articles/2017-11-14/nike-knocked-by-unions-for-
company-s-tax-avoidance-strategies}.
Moving Money across Borders: Attaining Efficiencies and Reducing Taxes
Firms transfer liquid funds across borders as dividend remittances, royalty payments and
fees, transfer prices, and fronting loans.
Dividend Remittances
The most common method of transferring funds from subsidiaries to the parent is through
dividends.
Royalty Payments and Fees
Royalties represent the remuneration paid to the owners of technology, patents, or trade
names for the use of that technology or the right to manufacture and/or sell products
under those patents or trade names.
A fee is compensation for professional services or expertise supplied to a foreign
subsidiary by the parent company or another subsidiary.
Transfer Prices
Transfer prices can be used to position funds within an international business.
Fronting Loans
Fronting loans circumvent host government restrictions on the remittance of funds and
have certain tax advantages.
CRITICAL THINKING AND DISCUSSION QUESTIONS
QUESTION 1: Why do the accounting systems of different countries differ? Why do
these differences matter?
ANSWER 1: Accounting systems are shaped by the environment of the country, and
have evolved to meet the nature of demand for accounting information in that country.
borders difficult.
QUESTION 2: Why might an accounting-based control system provide headquarters
management with biased information about the performance of a foreign subsidiary?
How can these biases best be corrected?
Chapter 20 ‒ Accounting and Finance in the International Business
20-9
ANSWER 2: There are three primary reasons why accounting-based control systems may
provide headquarters management with biased information about the performance of a
subsidiary: exchange rate changes, transfer prices, and general economic conditions.
Because exchange rates can change over the course of a budget, translated financial data
can be misleading—an increase in domestic sales could actually show up as a decrease
after translation due to home currency appreciation. By using a common exchange rate
QUESTION 3: You are the CFO of a U.S. firm whose wholly owned subsidiary in
Mexico manufactures component parts for your U.S. assembly operations. The subsidiary
has been financed by bank borrowings in the United States. One of your analysts told you
that the Mexican peso is expected to depreciate by 30 percent against the U.S. dollar on
the foreign exchange markets over the next year. What actions, if any, should you take?
ANSWER 3: This issue suggests that some interest and principal will have to be repaid in
U.S. dollars in the near future, but the plan was likely to pay this off out of earnings from
the Mexican subsidiary. Paying off the entire loan in advance before the peso depreciates
would be a good option. At least the peso funds could be transferred out of Mexico now
and invested in the U.S. in dollars to pay off the loan later. Alternatively, it may be
QUESTION 4: You are the CFO of a Canadian firm that is considering building a $10
million factory in Russia to produce milk. The investment is expected to produce net cash
flows of $3 million each year for the next 10 years, after which the investment will have
to close down due to technological obsolescence. Scrap values will be zero. The cost of
capital will be 6 percent if financing is arranged through the Eurobond market. However,
you have an option to finance the project by borrowing funds from a Russian bank at 12
percent. Analysts tell you that due to high inflation in Russia, the Russian ruble is
Chapter 20 ‒ Accounting and Finance in the International Business
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expected to depreciate against the Canadian dollar. Analysts also rate the probability of
violent revolution occurring in Russia within the next 10 years as high. How would you
incorporate these factors into your evaluation of the investment opportunity? What would
you recommend that the firm do?
ANSWER 4: In considering these investments there are three basic steps:
There are several different ways of approaching this problem, and the method outlined
below is just one. Different assumptions would lead to different answers.
(1) Make a basic analysis of the investment:
A quick analysis of the basic problem: a $10 million investment that pays $3
million/year for 10 years shows a ROI of 27 percent, suggesting that this is a
good opportunity.
(2) Adjust for risk:
In the case of Russia, the likelihood of violent revolution, which could
damage the plant irreparably or cause the firm to lose ownership is probably
as likely to occur in the first year as it is in any future year. Hence treating
can be factored into the yearly cash flows.
(3) Determine whether it would be better to fund the project from Canada or Russia
or not at all.
(a) Russian funds: If we assume that if there is a violent revolution, we would
neither earn money nor have to pay back the bank. (Let them have the plant if
they are around to get it from the revolutionaries.) The financing in Russia
looks very good. Having a 27 percent ROI while having to pay only 12
percent shows this to be a very profitable investment. And even if it does fail
(b) Eurobond Funds: Eurobond investors would still want to be paid even if
the plant goes out of production. They will also want to be paid most likely in
U.S. dollars or some European currency; it is unlikely that the Eurobonds
Chapter 20 ‒ Accounting and Finance in the International Business
20-11
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approach would be to discount the cash flows for economic/political risk,
discount them for the currency depreciation, make payments on the
Eurobonds, and then determine the net present value of the remainder. The
quick calculation shows that this is still a positive net present value option.
After more careful analysis, both choices would likely yield a positive net present value,
although which one is higher is not obvious. While one can make estimates for the risks
and include them as suggested, it is clear that the Eurobond option exposes the firm to
CLOSING CASE: Tesla, Inc.—Subsidizing Tesla Automobiles Globally
Summary
The closing case explores Tesla, the U.S. maker of electric cars. Tesla, founded in 2003,
is a leading manufacturer of electric cars. With more than $7 billion in sales, the
company has capitalized on government incentives offered to buyers of electric vehicles,
particularly within the European Union. Discussion of the case can begin with the
following questions:
QUESTION 1: Should companies like Tesla rely on government subsidies in selling their
cars since they are better for the environment than traditional cars based on the old
technology of traditional combustion engines? Basically, should the environmental issues
be built into the competitiveness of the car pricing of electrical cars or should supply and
demand be the driver of the electrical cars’ prices?
ANSWER 1: This question will probably generate considerable classroom debate. Some
students will suggest that given the evidence on climate change and the effect of
combustion engines on the environment, every effort should be made to limit the use of
traditional vehicles with their high CO2 emissions in favor of increasing the use of
QUESTION 2: Some governments are more likely to subsidize electrical cars (and many
other products) than other governments. Denmark took a stand to not subsidize (for now)
Chapter 20 ‒ Accounting and Finance in the International Business
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electrical cars. Should such subsidies be up to each country or region in a country (e.g.,
California in the U.S.), or should there be a world standard enforced perhaps via the
World Trade Organization, United Nations, or a similar organization?
ANSWER 2: Student answers will vary depending on their response to question 1. Those
supporting the need to move quickly to protect the environment will probably be in favor
QUESTION 3: Tesla made a remarkable sales growth—from a startup (albeit with great
financing) to $7 billion in sales with some $25 billion in assets. Does this mean that the
Tesla business model was good and the market reacted positively, government subsidies
were generous, and the market favored the car brand because of it, or a combination?
ANSWER 3: Most students will probably suggest that a variety of factors contributed to
QUESTION 4: If all government subsidies went away worldwide to electrical cars, will
Tesla be as successful in five years as it is now? (Will Tesla even exist in 10 years?)
ANSWER 4: Responses to this question will vary based on responses to the previous
Another Perspective: To learn more about Tesla and the subsidies it receives, go to:
{https://www.tesla.com/} and {http://www.latimes.com/business/la-fi-hy-musk-
subsidies-20150531-story.html}.
MHE INTERNATIONAL BUSINESS VIDEO LIBRARY
Please click here to visit our International Business Video Library which provides an
ongoing stream of updated video suggestions correlated by key concept and major topic.
Every new clip posted is supported by teaching notes and discussion questions. Please
feel free to leave comments in the library that you feel might be helpful to your
colleagues.
INCORPORATING globalEDGE™ EXERCISES
Chapter 20 ‒ Accounting and Finance in the International Business
20-13
Use the globalEDGE™ site {globaledge.msu.edu/} to complete the following exercises:
Exercise 1
The inflation rate of a country can affect financial planning in multinational corporations
since the value of receivables in each country can face significant devaluation if the
inflation rates are high. Your company has operations in the following countries: Belarus,
Costa Rica, Finland, Iceland, Paraguay, Thailand, and Zimbabwe. Use the Country
Comparator on the globalEDGE™ site to rank the risk of devaluation of your company’s
receivables from highest to lowest, based on the most recent data available for each
country. What precautions can your company take in the countries at the top of this list to
minimize the risk?
Exercise 2
The top management of your company has requested information on the tax policies of
Argentina. Using the country guide for Argentina on Deloitte International Tax and
Business Guides—a resource that provides information on the investment climate,
operating conditions, and tax systems of major trading countries—prepare a short report
summarizing your findings on business taxation in Argentina.
Answers to Exercises
Exercise 1 Answer
Additional Info:
Country Comparator is a globalEDGE™ tool that allows users to generate a comparison
Exercise 2 Answer
Additional Info:
Deloitte's International Tax and Business Guides focus on the investment climate,
operating conditions, and tax system of most major trading countries. The guides are
